Poverty alleviation through financing microenterprises with equity finance

Salman Ahmed Shaikh (Faculty of Economics and Management, Universiti Kebangsaan Malaysia, Bangi, Malaysia)

Journal of Islamic Accounting and Business Research

ISSN: 1759-0817

Publication date: 13 February 2017

Abstract

Purpose

This paper aims to achieve scale, efficiency and mitigate high monitoring costs, and explores the efficacy of micro equity finance at the enterprise level. The study compares the economic features of the proposed framework with interest-based debt finance.

Design/methodology/approach

This study uses a mathematical model to highlight the problem of agency costs including adverse selection and moral hazard.

Findings

Debt finance requires frequent repayments and indebtedness for financial inclusion. Conversely, the Islamic equity modes of financing in their current baseline structure suffer from high agency costs. By using enterprise level finance and distinct entry criterion for availing Islamic debt-based and micro equity finance, Islamic microfinance institutions (IMFIs) can reach the right targets and effectively mitigate the problem of adverse selection and high monitoring costs. The study suggests a framework in which equity financing could be used to fund microenterprises that will employ poor people with related skills.

Research limitations/implications

As the preferable modes of Islamic finance, i.e. Musharakah and Mudarabah, are not used by Islamic financial institutions (IFIs), empirical analysis of performance is not possible as they are rarely used.

Practical implications

The study suggests a workable model that can use Islamic equity-based modes of financing to improve microfinance outreach and achieve scale. The use of equity financing will help the Islamic finance industry to move toward its egalitarian vision, and the practical implementation of the model will help in reducing poverty in the Muslim majority countries.

Social implications

Muslim countries host half of global poverty, even though their share in global population is only one-fourth. Hence, there is need for solutions in achieving scale in poverty alleviation efforts.

Originality/value

Using a mathematical model, the paper presents agency problems in Islamic microfinance and proposes a solution through distinct entry criterion and enterprise level micro equity finance.

Keywords

Citation

Shaikh, S. (2017), "Poverty alleviation through financing microenterprises with equity finance", Journal of Islamic Accounting and Business Research, Vol. 8 No. 1, pp. 87-99. https://doi.org/10.1108/JIABR-07-2013-0022

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Publisher

:

Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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